Large Tankers To Benefit From Caribbean Crude Oil Shift To Asia

We believe that surging domestic production in the US is will affect the tanker routes in the Caribbean, as countries such as Colombia and Mexico are forced to look for new markets. While we expect Mexico to continue to look towards Europe, we believe Colombia and Venezuela will find ready markets for their sour crude in countries such as China, due to its escalating car ownership levels. We believe this will, in turn, benefit VLCC vessels and the Suezmax class, both of which are large enough to make the long-haul journeys from the Caribbean and take advantage of economies of scale. However, we believe this growing trend will be detrimental to the smaller Aframax class which will be reduced to a small-load Caribbean courier.

Previously, Caribbean crude oil was the main feedstock for US refineries on the Gulf Coast. However there is an ongoing decline in US oil imports from the Caribbean Basin due to the rapid increase in its domestic production of oil. This reduced demand, which current estimates put at around 500,000 barrels per day (b/d), is having a marked impact on the routes taken by oil tankers in the Caribbean, as large producers in the Caribbean Basin are forced to look elsewhere for markets for their products. Tanker lines are being obliged to redesign their chartering strategies to take this into account.

This shale revolution has weakened the market for the US' traditional crude oil suppliers (such as Mexico and other oil producing countries in the Caribbean Basin). According to our calculations, net crude oil imports in the US have fallen 16.2% from its peak of 10.09mn b/d in 2006 to 8.46mn b/d in 2012 as crude oil output rose 27.4% from 5.09mn b/d to 6.48mn b/d over the same period. We expect this trend to continue to intensify over the coming years.

Domestic Production Negates Need For Imports
US Crude And Other Petroleum Liquids Production ('000) b/d

Large Tankers To Benefit From Caribbean Crude Oil Shift To Asia

We believe that surging domestic production in the US is will affect the tanker routes in the Caribbean, as countries such as Colombia and Mexico are forced to look for new markets. While we expect Mexico to continue to look towards Europe, we believe Colombia and Venezuela will find ready markets for their sour crude in countries such as China, due to its escalating car ownership levels. We believe this will, in turn, benefit VLCC vessels and the Suezmax class, both of which are large enough to make the long-haul journeys from the Caribbean and take advantage of economies of scale. However, we believe this growing trend will be detrimental to the smaller Aframax class which will be reduced to a small-load Caribbean courier.

Previously, Caribbean crude oil was the main feedstock for US refineries on the Gulf Coast. However there is an ongoing decline in US oil imports from the Caribbean Basin due to the rapid increase in its domestic production of oil. This reduced demand, which current estimates put at around 500,000 barrels per day (b/d), is having a marked impact on the routes taken by oil tankers in the Caribbean, as large producers in the Caribbean Basin are forced to look elsewhere for markets for their products. Tanker lines are being obliged to redesign their chartering strategies to take this into account.

This shale revolution has weakened the market for the US' traditional crude oil suppliers (such as Mexico and other oil producing countries in the Caribbean Basin). According to our calculations, net crude oil imports in the US have fallen 16.2% from its peak of 10.09mn b/d in 2006 to 8.46mn b/d in 2012 as crude oil output rose 27.4% from 5.09mn b/d to 6.48mn b/d over the same period. We expect this trend to continue to intensify over the coming years.

Domestic Production Negates Need For Imports
US Crude And Other Petroleum Liquids Production ('000) b/d

We expect Mexico to continue to focus on Europe as a new market for its sweet crude oil exports, as the region has rising demand. These routes have already been established and will require little adjustment for the tankers. However, countries such as Colombia and Venezuela that produce sour crude are more likely to find ready markets in China, which is already geared up to refine sour crude. China is seeing a rapid escalation in the demand for crude, in part due to soaring car ownership levels and the concomitant need for fuel. We forecast that the country's total vehicle fleet in 2014 will see a 25.5% increase year-on-year, to almost 140mn units, and project this uptrend to continue, reaching almost 440mn units by 2018. Considerations such as these will, we believe, result in an increasing number of tanker lines changing their routes to cater to the rising Asian demand for Caribbean crude.

Car Ownership Drives Up Fuel Demand
China Vehicle Fleet (mn units)

Larger carriers such as VLCCs (with capacities between 2.1mn and 3.1mn bbl) and Suezmax vessels (with a capacity of around 1mn bbl), will, we feel, stand to benefit the most from these changing trade dynamics. The longer haul voyages favour them as they can haul more crude oil in each trip, offering greater economies of scale.

In particular, we believe Bermuda-based North American Tankers, an oil tanker specialist that is currently enlarging its Suezmax fleet from 20 to 40, might be well placed to capitalise on this development.

Moreover, as US demand slowed, shipping rates have fallen steadily for the Caribbean oil tankers. However, we believe this will change as the new markets will require significantly longer journeys, driving up rates.

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